Those of you who have been following international news will not escape the constant bombardment of news with regards to the US President, Donald Trump and his trade war with China. Notwithstanding the huge tariffs imposed on the billions of products and commodities, there is one particular issue that has been a thorn in Donald Trump’s flesh that is Huawei which is currently the leader in 5G technology.
Donald Trump has been targeting Huawei by barring US companies from doing business with them, although now he has gone back on his word on the ban. The Trump administration previously warned other nations that using Huawei’s technology and equipment for 5G will incur risk of spy threats from China. We are not sure how true this statement is but we can see just how important 5G is to a nation that even the President of the United States himself have to interfere and protect its interest. So much so that the people has termed this trade war as more of a “tech war” now.
What Is 5G?
What exactly is the big deal with 5G and why the US and China going to war for it?
5G is the next generation of mobile broadband that will eventually replace or complement our 4G LTE connection. You will get faster download and upload speeds of up to 1 Gbps or 1,000Mbps with 5G. Latency or the time it takes devices to communicate with each other via wireless networks will also decrease tremendously.
The new world of 5G will transform our lives by connecting millions of devices and make anything possible from driverless cars to smart homes and even smart cities. 5G’s lightning fast speed will interconnect most of everything that we use in our daily lives. Just to put things into perspective of how fast 5G is, you can download the whole eight seasons of Game of Thrones in just under 1 minute! This is why US and China are competing on who takes the lead on 5G because winning the race means adding millions of jobs and an extra $500 billion to a country’s gross domestic product.
Due to faster connection speeds and literally close to zero latency, 5G will encourage and power a huge surge amounts of data from people known as Big Data. As such, the next coming trends that we need to take note of are Internet of Things, Artificial Intelligence, Deep Learning, Autonomous Driving and last but not least, Data Centers. Only from knowing these trends can we identify which companies that will benefit from 5G in the near future. Here are the top 3 companies to watch out for from the 5G boom.
NVIDIA was previously known as a gaming company providing its Graphics Processing Unit (GPU) for computer gaming and mainstream personal computers. Instead of the general purpose offering of GPU, NVIDIA now specializes and optimizes its GPUs to cater to needs of different market segment. They work with industry partners to specialize their GPU offerings. They concentrate their effort on four main market drivers which are gaming, AI, data center and automotive. NVIDIA’s GPU gives the power to accelerate deep learning, machine learning, and high-performance computing workloads.
The gaming industry will continue to grow and graphics will continue to improve. NVIDIA has an advantage in this area due to its specialized GPUs. As mentioned above due to rise of 5G and Big Data, there will be a surge of AI and data centers around the world which must at least have GPU enabled machines available to meet the rising demand for parallel computing. NVIDIA in 2019 has further solidify their position into data centers when they purchased Mellanox for USD 6.9 billion. With Mellanox, NVIDIA can further optimize data center scale workloads across the entire computing, networking and storage stack to achieve higher performance, greater utilization and lower operating cost for customers. As for NVIDIA’s foray into autonomous vehicles, if the future of cars is in driverless technology, we can be certain that almost every car will have a NVIDIA GPU in it.
NVIDIA earns a consistent revenue and profit throughout the years but experience a sudden increase from 2017 onwards. This is due to the previous cryptocurrency hype which needs NVIDIA’s high-performance computing GPUs for Bitcoin mining.
NVIDIA has a strong healthy balance sheet. Total assets and total liabilities have been growing at a steady pace.
The gaming business of NVIDIA helps them generates a steady operating cash flow. As we can see from 2017 onwards, their cash flow from operation spikes in relation to their revenue due to the cryptocurrency trend.
Intel Corporation is the world’s largest semiconductor manufacturer. It offers a broad range of semiconductor products that include microprocessors, chipsets, motherboards, flash memory, and wired and wireless connectivity products.
INTEL’s business can be separated into the PC Centric Business which is the Client Computing Group which now contributes 53% of their total revenue and the Data Centric Business which are the Data Center Group, Internet of Things Group, Non-Volatile Memory Solutions Group and Programmable Solutions Group which contributes the balance 47% of their total revenue. From here, we can now see that INTEL’s data-centric business has been representing almost half of their share of their overall revenue.
Bob Swan, INTEL’s CEO has said, “We continued improving the performance and capabilities of our industry-leading CPUs while expanding our efforts to win in growth areas like AI, autonomous driving and 5G.” Therefore, we can see that INTEL is now in the midst of a corporate transformation which grow beyond the traditional PC and server businesses into data-rich markets addressing the explosive demands to process, analyze, store and transfer data.
INTEL’s product serves a variety of semiconductor markets and provides end-to-end solutions. Their processors help their customers process and analyze the flood of data in computers or cloud. Their processors are also in demand in the growing gaming market segment. INTEL’s memory and storage products serve the need for data centers. The acquisition of Mobileye by INTEL in 2017 is expected to position Intel as a leading technology provider in the fast-growing market for highly and fully autonomous vehicles.
We can see that INTEL’s revenue and income has seen stagnant growth and achieving the same amount throughout 2010 to 2017. For the year 2018, there was a spike in revenue and profit. Revenue was $70.8 billion, up $8.1 billion, or 13%, from 2017. The increase in revenue was primarily driven by strong performance across their data-centric businesses, which collectively grew 18% year over year and made up nearly half of their total revenue in 2018. Not to forget that INTEL’s net profit margin now is at an astonishing 29.04%!
INTEL has a strong healthy balance sheet. Total assets and total liabilities have been growing at a steady pace.
INTEL has been generating positive and steady cash flow from operations year after year and as mentioned, there was a huge increase in operating cash flow for the year 2018 in tandem with their revenue and profits. This shows INTEL has good quality of earnings. With these constant cash coming into their hand, INTEL has a competitive advantage against their peers because they will always have a budget to invest in research and development to accelerate their growth and profitability.
This company is not as big and well-known as the two companies above but it has high potential to ride the huge wave of 5G technology in the future. MICRO-MECHANICS is based in Singapore and this company designs, manufactures and markets high precision tools, parts and assemblies for the semiconductor, medical, aerospace and other high technology industries.
This means MICRO-MECHANICS makes the vital and important tools that semiconductors companies need to use to manufacture their processors, memory chips, integrated circuits and others. MICRO-MECHANICS serves more than 600 active customers around the world and derives a steady recurring income from supplying consumable products which require regular replacement.
Now we know that 5G will empower a huge demand for Internet of Things, Artificial Intelligence, Deep Learning, Autonomous Driving and Data Centers, all of these will need semiconductor products like computer processing units, graphic processing units, integrated circuits, memory chips etc. For the semiconductor companies to manufacture these, they will definitely need the highly precise tools from MICRO-MECHANICS to make them.
Both the revenue and income of MICRO-MECHANICS has been steadily increasing together with its net profit margin. Currently MICRO-MECHANICS has a revenue of SGD62.08 million with a net income of SGD 14.20 million which translates to 22.88% net profit margin which is very impressive.
MICRO-MECHANICS has a very healthy balance sheet. Total assets have also been steadily increasing and far outweighs total liabilities which has been kept as a consistent level throughout the years.
What we love about MICRO-MECHANICS is its consistent and ever-increasing cash flow from operations. As such, MICRO-MECHANICS has no problem allocating budget to invest in research and development into the next 10nm process technology or distributing dividends to their shareholders.
So there you go, the top 3 companies that you should keep an eye on for the 5G boom! Now that you know the facts and figures of these companies, the next crucial question is what will you do when crisis comes? Will you press the button to invest or continue staying at the sidelines? The choice is yours. Until then, stay tuned and happy investing!
*All financial data from WealthPark, an investing tool for stocks to help you build your wealth by investing smarter, faster, and easier.
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.
This article was written by Team VIC
Team VIC is formed by experienced and well-trained individuals from Value Investing College (VIC). The team has been consistently studying the latest stocks market trend in order to focus on educating the layman on investment principles and techniques.